In a previous post “Market Bubbles,” I touched on George Soros’ “theory of reflexivity.” Interestingly, MarketWatch discussed with George why he no longer participates in the “bubble.” The foundation of his argument comes from his previous work in “Alchemy of Finance.” To wit:

“Pivoting to his legendary approach to financial markets, Soros acknowledges that investors are in a bubble fueled by Fed liquidity, which creates a situation that he now avoids. He explained that ‘two simple propositions’ make up the framework that has historically given him an advantage. However, since he shared it in his book, ‘Alchemy of Finance,’ the advantage is gone.” – MarketWatch

Specifically, he eludes to his “theory of reflexivity.”

“One is that in situations that have thinking participants, the participants’ view of the world is always incomplete and distorted. That is fallibility. The other is that these distorted views can influence the situation to which they relate, and distorted views lead to inappropriate actions. That is reflexivity.”

Before we get into the issue of “reflexivity,” let me recap what a “bubble” is.

Bubbles Are About Psychology, Not Metrics

“Market bubbles have NOTHING to do with valuations or fundamentals.”

Over the last few weeks, I have touched on the impact of valuations and forward returns. However, it is not just valuations, but also the surge in corporate debt and declining profitability resulting from weak economic growth. Historically, such a combination of factors is associated with previous “bear markets.”